Brazil economic activity drops the most since December 2008

Brazil’s economic activity in May fell the most since December 2008, as accelerating inflation slows consumption in the world’s second-largest emerging market. Swap rates fell.

The seasonally adjusted economic activity index, a proxy for gross domestic product, fell 1.40% in May after rising a revised 0.96% in April, the central bank said today in a report posted on its website. It was the largest decline since growth dropped 4.27% in December 2008. Analysts expected a 1.15% contraction, according to the median estimate of 22 economists surveyed by Bloomberg.

President Dilma Rousseff’s administration is working to combat inflation that has undercut economic growth by curbing business sentiment and consumption. Industrial production in May fell by 2%, while retail sales remained flat in the same month. The central bank this week raised the benchmark interest rate by 50 basis points for the second straight meeting, after warning last month that the outlook for inflation remains unfavorable.

The economic activity number “reinforces the idea that Brazil’s economy is not growing,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “The market follows this number closely. It was a weaker number than expected, and the swaps market is reacting to that.”

Swap rates on the contract maturing in January 2015 fell three basis points, or 0.03 percentage point, to 9.56% at 9:24 a.m. local time. The real weakened 0.3% to 2.2621 per U.S. dollar.

Annual inflation in June quickened to 6.7%, the fastest since October 2011, exceeding the ceiling of the bank’s target range of 2.5% to 6.5%.

The non-seasonally adjusted economic activity index rose 2.28% from a year ago, compared with a median estimate of a 2.80% gain, the central bank report said.